VALUATION HIGHLIGHTS

1. Company Operated Stores constitute 62% of the Trefis price estimate for Starbucks's stock.
2. Licensed Stores constitute 27% of the Trefis price estimate for Starbucks's stock.
3. CPG, Food Service & Other constitutes 11% of the Trefis price estimate for Starbucks's stock.

WHAT HAS CHANGED?

U.S. Strength Offset A Slowdown In China

Starbucks posted a 15% year-over-year (y-o-y) sales increase with U.S. same-store sales growing to 12% in FY Q2. Overall, the company posted global same-store sales growth of 7%, which is again impressive given the weak results from China - where comparable store sales declined 23% during Q2. The company's prior investments in delivery, mobile app, beverage innovation, and its membership program have generated loyalty. Mobile orders and payments were up 20% year-over-year (y-o-y) in the fiscal second quarter, and the delivery business was up 30%. Starbucks reported 26.7 million 90-day active rewards members in the U.S. as of April 3, an increase of 17% y-o-y. As a result of its loyalty program, these customers accounted for 54% of revenue at company-owned stores in the U.S. in Q2. On its Q2 earnings call, Starbucks suspended its sales guidance because of the lockdowns in China.

Note: Starbucks FY'21 ended on October 3, 2021. Q2 FY'22 refers to the quarter that ended on April 3, 2022.

Strabucks Pulls Out of Russia

Starbucks officially announced that it will exit Russia after suspending its business in the nation in March in reaction to the Russian invasion of Ukraine. It has 130 locations in Russia and it operates through various licensing deals. The region accounts for less than 1% of the company’s annual revenue. The coffee store operator said it will pay nearly 2,000 Russian workers for six months and help them transition to new opportunities. Meanwhile, it has not disclosed the financial impact of winding down in Russia in its filings.

Growth in China

China continues to remain a long-term growth driver for the company, as its GDP, projected to exceed $15 trillion by 2021 from $11 trillion in 2014, is expected to fuel a massive increase in its middle class. Moreover, the per capita coffee consumption in China is about one-half of one cup per person per year compared to approximately 300 cups per person per year in the U.S. While consumption levels in China may never be able to match those in the U.S., even attaining a small fraction of it will benefit the company immensely.

BUSINESS SUMMARY

Starbucks is the world’s leading roaster and retailer of specialty coffee. Through its global network of owned and franchised coffee retail outlets, Starbucks offers a wide range of products like high-quality whole bean coffees, freshly brewed coffees, Italian-style espresso beverages, cold blended beverages, food items like sandwiches, premium teas, and coffee making equipment.

Starbucks' own stores are located near offices and residential areas and are larger in size, compared to its licensed stores that are much smaller and mostly located at airports and supermarkets.

Starbucks also sells its packaged coffee and tea through retail channels such as grocery stores, warehouse clubs, convenience stores, and US foodservice accounts.

SOURCES OF VALUE

The Company-Operated Stores division is more valuable than the Franchise Stores division for Starbucks because of the following two reasons:

Company operated stores generate more revenues than franchised stores

Starbucks makes money through its company-owned stores as well as through franchise fees and royalties from franchised stores. Starbucks earns higher profit margins from franchised stores compared to company-owned stores because there are no operational and employee costs involved with franchised stores, hence Starbucks gets to keep the entire royalty & rent fee without paying for any costs.

Revenues earned from Starbucks' company-owned stores are much higher than the franchised stores. This is because, although there are costs involved, Starbucks owns 100% of the revenues from its own restaurants, while it gets a percentage of the revenues (in the form of royalty fees) from its franchised restaurants.

Number of company-owned stores comparable to franchised stores

Food & beverage companies, in general, increase their reach and profits by having a large base of franchised stores. For example, McDonald's has four times more franchised restaurants than company-owned restaurants, making the franchise business more valuable to its stock. However, Starbucks has almost an equal number of company-owned stores and franchised stores. In FY 21, Starbucks had 17,133 company-owned stores and 16,700 franchised stores making a total of 33,833 stores.

KEY TRENDS

International expansion fueling growth

Most of the new restaurants the company plans to open are in China/Asia Pacific. The number of Starbucks outlets in these countries are still much less than the number in the U.S. New outlets opened will be a mix of company-operated and franchised restaurants. SBUX remains on track to add 600 net new stores per year and to achieve its goal of 6,000 stores in 230 cities across Mainland China by the end of fiscal 2022.

Focus On Drive-Thrus

SBUX intends to open a majority of its new U.S. restaurants in middle America and the south, with over 80% of stores built in the year being drive-thrus. The company states that their research has indicated significant opportunities for store expansion in higher growth, lower cost markets, particularly when considering rising wages and occupancy costs.

Deal With Nestle

Starbucks and Nestle announced plans for a $7.2 billion license deal that would allow the latter to market, sell, and distribute the coffee giant's brands in Consumer Packaged Goods (CPG) and Foodservice. This global coffee alliance, which brings together the world's leading coffee brand and retailer, and the biggest food and beverage company globally, gives Nestle a stronger footing in its fight against JAB Holdings, the world's second largest player in the coffee space. For Starbucks, on the other hand, this deal paves the way for expansion into markets where the company has no CPG presence. Starbucks will also be supplying the coffee to both the Nespresso and Dulce Gusto machine platforms, opening its access to the addressable, single-serve coffee market.